MUMBAI - India's central bank raised interest rates for the second time in as many months on Tuesday, warning that inflation is likely to remain elevated despite sluggish growth, and rolled back an emergency measure put in place in July to support the rupee.
The Reserve Bank of India (RBI) lifted its policy repo rate by 25 basis points (bps) to 7.75 per cent, in line with expectations in a Reuters poll.
"Overall WPI (wholesale price index) inflation is expected to remain higher than current levels through most of the remaining part of the year, warranting an appropriate policy response," RBI Governor Raghuram Rajan said in his review.
While Rajan refrained from giving more explicit guidance, some RBI watchers say he may not yet be finished tightening. In last week's Reuters poll, the median expectation was for monetary policy to remain on hold at upcoming reviews.
"Another hike is still possible given that the policy stance is still hawkish, not dovish at all," said Ganti Murthy, head of fixed income at IDBI Asset Management Co Ltd. The RBI next meets in December.
With the rupee having stabilized after a summer slide, the RBI as expected also lowered its Marginal Standing Facility (MSF) rate by a further 25 bps to 8.75 per cent, which eases liquidity in the banking system by lowering the cost of borrowing for lenders.
Rajan, a high-profile former chief economist at the International Monetary Fund, took office in early September and stunned markets in his first monetary policy review just weeks later by raising interest rates to combat fierce price pressures dogging Asia's third-largest economy.
"Today's move was a follow-through of the hawkish September policy guidance, as high and persistent inflation is seen as an impediment to the medium-term growth outlook," said Radhika Rao, economist at DBS in Singapore.